Health Reform Pharmaceuticals

Should R&D cost figure in to CMS’s maximum fair price (MFP)?

According to a paper by Garrison and Towse (2023) in Health Affairs Forefront the answer is ‘no’. I agree with them. Here is the rationale:

…this request for R&D cost information reflects a fundamental misunderstanding of the economics of the regulated US and global pharmaceutical marketplace. Writing in this journal in 2004 on the pros and cons of alternative approaches for Medicare drug pricing, Professor Joseph P. Newhouse said: “Large drug companies have many products, and allocating joint costs across those products is arbitrary. … companies must cover the R&D costs of their unsuccessful drugs or go out of business, so reimbursing only those costs that can be directly associated with drugs on the market seems pointless.” And more recently in ForefrontHenry Grabowski and Richard Manning had the following to say about hepatitis C drugs: “The sellers of these drugs did not charge high prices because they had spent a lot of research and development; they were able to set high prices because the products generated remarkable new value to patients.”
For these reasons, we believe that any estimated R&D costs submitted under the law would be irrelevant to the determination of the maximum fair price (MFP) for a specific product.

Even it cost-based pricing were desirable, drug manufacturers currently do not track their costs specifically by product:

Although estimates of the cost of specific trials could, in principle, be produced, the costs of all the individuals in the biopharmaceutical organization who are working on multiple products during the pre-launch period—including discovery and pre-clinical phases—are not routinely tracked or allocated to a specific product. Thus, it would most likely be infeasible to provide this information accurately.

They conclude saying:

In other words, we believe officials implementing the IRA should either focus on an MFP linked to value, driven by comparative effectiveness; or an MFP linked to simulating a post-patent/post-exclusivity market with potential generic or biosimilar entry. In either case, R&D costs are irrelevant, even if they could be appropriately attributed.

The full article–with a title of “The IRA’s Request For Product-Specific R&D Cost Information: Short-Sighted And Irrelevant“– can be read here.